Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Dividend Aristocrats: Time to Buy Medtronic, Inc. Stock?

This 2% payout is likely to keep growing.

It's always smart to consider dividend-paying stocks for your portfolio, as dividends can be such powerful wealth boosters. (Really – they're not just for retirees!) A great place to find some solid contenders is among Dividend Aristocrats, companies that have raised their dividend payouts each year for at least the past 25 years. Let's get to know one Dividend Aristocrat, Medtronic(NYSE:MDT), and see whether this is a good time to invest in some shares.

Nuts and boltsThe company was founded in 1949, and it rakes in about $17 billion annually. It specializes in cardiac and vascular disease management (think pacemakers, defibrillators, stents, valves, and catheters), diabetes management (pump therapies, glucose monitoring), and restorative therapies (implants, electrical therapies, and much more).

Medtronic is in the process of buying medical device and supply giant Covidien(UNKNOWN:COV.DL) for nearly $43 billion, which will boost its presence in fast-growing emerging markets and might lead to a higher dividend, too. The deal offers tax benefits, as Covidien is based in Ireland and by moving its headquarters there, Medtronic can enjoy Ireland's lower tax rate. But a recent U.S. crackdown on corporate "inversions" has led Medtronic to decide against using its offshore cash in the deal, and it will look more to debt financing instead.

Why Medtronic is appealingWhy else would someone want to own Medtronic? Well, let's start with its dividend, which yields 2%. Medtronic has raised its payout for 37 consecutive years now. Management has said that it aims to return 50% of free cash flow to shareholders, via dividends and share repurchases. The company's dividend has grown by an annual average of about 8% over the past five years, and with a payout ratio near 40%, there's plenty of room for further growth.

The Covidien purchase also offers much to like. As my colleague Todd Campbell has explained, Covidien will help Medtronic grow, especially in developing economies: "Since Covidien's surgical tools are one of the first purchases made by new hospitals, Medtronic should be able to leverage Covidien's existing relationships to expand demand for its implantable devices." Recent sales growth in the massive markets of China and India has been sluggish, but management hopes that they will rise into double-digit rates.

The MiniMed 530G. Source: Medtronic.

Why you might hold off on MedtronicIf you're looking for rapid growth, you might not find it in Medtronic. The company's last quarter featured both revenue and earnings beating estimates, but with year-over-year growth rates still only in the mid-single digits. Medtronic's diabetes operations grew fastest, at 13%, in part because of its new MiniMed 530G continuous glucose monitor, but the diabetes business is still a relatively small one for the company.

Meanwhile, the company has very able competition from some deep-pocketed rivals, such as St. Jude Medical, Johnson & Johnson, and Stryker. This can be seen as a negative, but some see it as a positive, spurring the company to innovate more. Its Reveal LINQ miniaturized implantable cardiac monitor and Activa "brain pacemaker," for example, were designed with the hope of helping Medtronic compete against St. Jude.

Profit margins have been inching down lately, in part because of some product quality issues and litigation, but they are still robust, with net margins topping 17%. Medtronic's debt is considerable, recently topping $10 billion, but the company's cash ($14.2 billion) easily outstrips that, but the company will be taking on much more debt as it buys Covidien.

It's also worth remembering that while the deal to buy Covidien is promising, it's not a done deal yet, and if it falls through (such as because of antitrust concerns), so does some of Medtronic's hoped-for future growth.

Is it time to buy?There are plenty of reasons to want to buy into Medtronic, but its valuation is not very compelling at recent levels. Current and forward-looking P/E ratios of 22 and 16, respectively, are above the company's five-year average of 15. Its price-to-sales ratio of nearly 4 tops its five-year average as well as the industry average, while more than doubling the S&P 500's level.

Go ahead and keep an eye on Medtronic, but this doesn't seem to be best time to buy this Dividend Aristocrat.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian